Hong Kong Regulators Shift Focus to Corporations

First it was a housing bubble. Now Hong Kong regulators are shifting attention to the corporate sector.

Hong Kong massive increase in property prices the past five years could be exhibit A in the far flung effects of the U.S. Federal Reserve’s quantitative easing program. All that cheap money has landed on Hong Kong’s shores, worrying the government, which has clamped down over a dozen times to curb mortgage lending.

Demand for residential real estate has gone flat, so it appears banks are lending to the corporate sector instead.

The HKMA calculates that interest coverage ratios, or the ability of companies to pay debt service with the revenues they generate, have gotten worse the past three years. That’s because of a combination of more and more debt, and business performance not keeping pace. Company’s leverage ratios, or the value of a company’s assets on their balance sheet to their debt has also eroded.

Lending to corporations jumped 13.2% in the first half, from 3% growth in the second half of last year. Loans to companies make up 70% of Hong Kong banking loans, whereas mortgage lending is 21.5%. Meanwhile, mortgage lending grew just 3.1% in the first half of 2013, a slowdown from 5% in the second half of last year.

The HKMA figures the banks it regulates have enough capital to weather a storm. But the HKMA is worried as the Fed eventually does cut back on its monetary stimulus, Hong Kong will feel it.

“The debt-servicing ability of the corporate sector could be under test when interest rates rise,” it says. “To the extent that a large outflow of funds from

Hong Kong may take place as a result of Fed tapering, as some market participants anticipate, the situation would be aggravated,” the report says.

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